Fixed rate treasury bonds remain an unattractive investment proposition for several reasons:
- The high level of government spending at a federal and state level at a time of economic full employment will mean that aggregate demand continues to exceed aggregate supply. This is something that RBA Governor Bullock pointed out last October when asked if the RBA was considering a rate cut then.
- We don’t believe that the RBA will cut rates again for quite some time, unless one of the following occurs:
- There is an exogenous economic shock (like the pandemic).
- The financial system becomes unstable (like a bank collapse, e.g. SVB in the US in 2023).
- Unemployment rises above 4.75% while inflation is still above 2.5%.
- Inflation is below 2.5% for successive quarterly readings (RBA trimmed mean measure).
- There is a risk that Australian treasury yields will move much higher in the aftermath of what increasingly looks like a close Federal election. When the ALP was first elected in 2022 the Australian 10-year yield surged to a 75bps premium to the US yield due to the policy uncertainty of a new government. There is a risk that if the ALP are forced into minority government with a coalition of Greens/Teals, the instability of such a government, and the type of policies required for any level of cohesive government, would result in the Australian benchmark curve trading at a significant premium to the US curve once again.
- Globally there is pressure building for higher sovereign yields with both Germany and France facing near term pressure.
